Will Reference Pricing Impact Otolaryngology?

Most otolaryngologists likely have heard about reference pricing, the relatively nascent concept that a payer—be it a person, a plan, or a pension fund—contributes a set amount toward specific procedures. The most public example of the model is the California Public

Employees’ Retirement System (CalPERS), which in 2011 began using the concept to determine what a hospital would be paid for a variety of elective procedures, including high-cost services such as knee and hip replacements, colonoscopies, cataract surgery, and arthroscopic surgery.

Research has since shown that the model appeared to increase the use of ambulatory surgery centers, while employer and employee payments per procedure fell nearly 20%.

“In each of these very different areas [of procedures], there have been very significant savings for insurers,” said Timothy Brown, PhD, an associate adjunct professor of health economics in the School of Public Health at the University of California, Berkeley who has a research focus on reference pricing. “While we are still in the beginnings of the application of reference pricing to healthcare in California, it is a resounding success to date.”

So what does this mean for otolaryngologists, who don’t perform high-cost, high-frequency procedures such as hip and knee replacements? Right now, those who watch the specialty say it’s diligent observance and preparation for a future that could include the model.

“If this phenomenon picks up and major payers decide to include common otolaryngology procedures … [otolaryngologists] may need to adjust their costs accordingly, however they would accomplish that,” said Gordon Sun, MD, MS, chief medical quality officer and chief of otolaryngology at Rancho Los Amigos National Rehabilitation Center in Downey, Calif.

How Payment Works

To understand the program, Dr. Sun said to think about a tonsillectomy. Say that a payer—e.g., CalPERS or your state’s largest private insurer—has capped the price that it is willing to pay for the procedure at $2,000. “Beyond that threshold, the enrollee, if you will—the beneficiary—will have to pay the difference on top of a copay that the payer may implement,” he said. “The payer says, ‘We’ve got 50 otolaryngologists whom we’re contracted with. So, if you find a surgeon who will do the procedure for you for $1,500, great. Then, it’s covered by our program.” Other than perhaps a small copay, the insured won’t pay anything extra. If the insured finds a surgeon who is going to charge $3,000, then the insured will have to pay the copay plus the $1,000 difference, he added.
The numbers may not seem striking in otolaryngology, but in 2011, when CalPERS set its maximum payout for a knee or hip replacement at $30,000, the amounts quickly added up. Patients “flocked to lower-priced hospitals and outpatient surgical centers,” wrote health economist Austin Frakt, PhD, in the New York Times (August 8, 2016.) Prices and total spending for the procedures plummeted.
Through the program, CalPERS saved $2.8 million, or approximately $7,000 per patient, on hip and knee replacements in 2011 over 2010 rates, according to the Center for Studying Health System Change, a Washington, D.C., think tank founded by the Robert Wood Johnson Foundation (Health Affairs. 2013;32:1392-1397). Patient cost sharing decreased by roughly $300,000, or $700 per patient.

If this phenomenon picks up and major payers decide to include common otolaryngology procedures, otolaryngologists may need to adjust their costs accordingly. —Gordon Sun, MD, MS

Will Otolaryngology Be Impacted?

James Denneny III, MD, executive vice president and chief executive officer for the American Academy of Otolaryngology–Head and Neck Surgery, said his organization has been tracking reference pricing closely for years. While no otolaryngology procedures are currently included in the CalPERS program, Dr. Denneny said he must prepare should other states or private insurers eventually decide to include such procedures as tonsillectomies or tympanostomy tube insertion in their reference pricing programs.